Discussing How Foreclosure Affects Your Credit Report

clear credit

Many people who have been foreclosed upon hire a credit counselor to help mop up that messy credit report. Not only are all the missed payments tarnishing your record, but there's a "Notice of Trust Sale" and a "Trust Deed Sale" sitting ugly as well. Chances are, there is more than one area you are struggling with, so prioritizing with a counselor can definitely help. It's good to have someone working with you to improve your situation and increase the bad credit scores you've suffered. While the full impact of a foreclosure isn't likely to go away over the next year, you needn't suffer mercilessly for the next seven. Remember that the last 12 months factor most prevalently on your credit score, so a quick rebound is your best chance at regaining financial freedom once again.

Once you've looked at your credit report, you'll need to focus on improving your credit score. Pay all your outstanding bills on time, first and foremost. On-time bill payments account for roughly 35% of your credit score. Start with the highest interest rate cards and reduce your credit usage to 30% of what's been extended to you. Replenish your savings, your 401k and other retirement accounts. You may want to contact CCSInc.org to obtain credit counseling and take free financial classes to re-educate yourself on how to save and spend wisely. A foreclosure can really shatter your confidence, as well as your purchasing power, so it's important that you take this opportunity to reassess how you approach financial decision making as a whole.

So which is worse for your credit score, a foreclosure or a bankruptcy? Even though bankruptcy stays on your credit for 10 years and a foreclosure for 7, "a foreclosure is very serious to mortgage lenders," said Ray Hooper, Education and Housing Director for the Consumer Credit Counseling Service. "They're going look at a foreclosure more seriously than they will a bankruptcy that doesn't include the house." Hooper says if you're receiving default notices but still want to keep your house, then you'll need to catch up on those missed payments.

You can modify the agreement to a lower interest loan or ask for forbearance, which involves the lender agreeing to suspend payments until you get back on your feet. If you outspent yourself and wound up in a real pickle, then you can ask the lender to hold off on foreclosing until you sell. In some cases, you might not get the asking price and will still owe money to the lender. This procedure is called a short sale. In other cases, you may negotiate a "deed in lieu of foreclosure," which means you will give your house back to the bank and walk away with nothing, including clear credit.

If you've already faced a foreclosure, then the best thing you can do, aside from paying everything on time, is to raise a fuss. Some homeowners may be able to persuade a lender to remove the negative hit from their credit report. However, this is certainly not easy, and usually involves a legal attorney and a chunk of cash. Otherwise, the foreclosure will come off your report automatically in seven years. You'll probably have to dispute, threaten, sue and file complaints to get there, but often the bank would rather pay you off with clear credit than endure your barrage of aggravation. It's an ugly process, but if you're in a desperate situation or if you previously had a high rating credit score, then you may want to consider the attorney route.